VAT & Villas to Let?

We are not sure whether most of the
questions/uncertainties will be addressed over the
next 6 months or so, but we are concerned what will
be the situation in the meantime. For those that do
not act “correctly” there is no excuse that “the law
was not clear”. Unfortunately we were informed by
our legal consultants there is no difference if
clear or not!!

As we have
reported in a our previous article
VAT & Understanting, there
are many questions which are not answered by the new VAT
authority regarding real estate.

Residential lets are exempted from the 19% VAT charge, but
then this directive goes on to say that if the landlord
carries out a business activity, he might most likely be
responsible to charge it. You do appreciate that the 19% VAT
charge is high, so if villa/apartment owners let their units
out as a business e.g. seasonal lets (villa to let) as well
as AirBnB, will they not be liable for the VAT charge?

If
this is the case (we are waiting for the VAT people to let
us know) the rental cost will be increased by this (19%)
amount, making the cost of renting for holidays etc quite
high, reducing their tourist demand. The villas to let (AirBnB)
is nowadays big business and bearing in mind this source of
demand in Cyprus, with approximately 20% of the tourists
opting for this option you can appreciate this problem. Of
course, most of these lets are done through the internet and
foreign specialized firms and nobody declares the income.
Tax fraud it is indeed, but so far nobody in Government
bothers not even the C.T.O. If the VAT is an allowable
expense by the tenant to be deducted from the VAT received,
in this case there is no particular problem. But as most of
the lets are to individuals, especially foreign tenants, who
do not have VAT so registered and as such it is a problem.

Since the year 2008 Cyprus has avoided to have a VAT placed
in place for lets, land sales etc and for one reason or
another it has managed to by-pass it. Now with the E.U.
demand that there will be no more postponement, our
Government produced a rush job law so that we are not
charged with a hefty penalty. Being a rush job there are so
many loose ends and this is unbelievable. The director of
VAT suggests that for any ambiguities to seek advice from
him. That is okay, but what about in the meantime until all
or most questions are answered? So no one is 100% clear
whether to charge or not the VAT. If not charged and it
ought to have been charged, the authority may come back
after several years to impose the VAT plus penalties,
interest on non paid amounts etc. Unlike other tax
authorities, the VAT is one of the most “ruthless” and non
compromising authorities and VAT non payment is considered
to be a “criminal office”. In one
case where we sold 3 properties and we duly charge VAT on
our commission but then the deals fell through and we duly
refunded the reservation paid and cancelled the bill, the
VAT people opted to visit our accounts department for 2 days
with 3 staff to investigate the matter. Nothing was done
wrongly but it is just to show you that they mean business
(unlike income tax, Municipal taxes etc). It was explained
to us that VAT is a charge on behalf of the Government with
the VAT charger acting as a collector on behalf of the
Government - So if something goes wrong it is the
collector’s fault.

We are not sure whether most of the questions/uncertainties
will be addressed over the next 6 months or so, but we are
concerned what will be the situation in the meantime. For
those that do not act “correctly”
there is no excuse that “the law was not clear”.
Unfortunately we were informed by our legal consultants
there is no difference if clear or not!!

We must tell you about the following interesting story
regarding a kebab house at Nicosia. The shop was quite busy
but the VAT/Tax returns declared were next to nothing. The
authorities could not pin point the volume of the shop’s
business since the kebab product is a cash business and for
a low amount. Suddenly the tax authorities came up with the
idea of calculating the volume of the wrapping paper which
the shop bought!! It came out based on this that the shop
was selling approximately 1.000 pitta of kebab per day. End
result tax and VAT charges the pitta proprietor for
€250.000!! So watch out.